The maintenance tax limited tax (LT) bonds are secured by the district's
operations and maintenance (O&M) tax levy, limited to $1.04 per $100
taxable assessed valuation (TAV) unless district voters approve an
increase up to the state maximum of $1.17 per $100 TAV.

BELOW AVERAGE ECONOMIC INDICATORS: Edinburg has seen ongoing improvement
in income and wealth indicators. However, these indicators remain below
average. Local unemployment levels have been declining, but are still
above average.

VOLATILE TAV: The district's TAV has been variable and was negatively
affected by reduced oil and gas activity resulting in a 12% decline in
fiscal year (FY) 2013. TAV was flat in FY 2014.

MODERATE DEBT PROFILE: District debt levels are moderate, even without
consideration of substantial state support for the district's
outstanding debt. Average principal amortization and a lack of near-term
debt issuance plans should result in continued moderation in debt ratios.

RATING DIFFERENTIAL FOR LIMITED TAX BONDS: The one-notch rating
differential for the maintenance tax bonds reflects the limited
flexibility in the district's O&M tax rate, currently at the
state-mandated tax rate cap of $1.17 per $100 TAV.

RATING SENSITIVITIES

The rating is sensitive to shifts in fundamental credit characteristics
including the district's strong financial management practices. The
district's history of maintaining solid reserves while addressing
operating and capital needs indicates continued rating stability.

CREDIT PROFILE

Serving an estimated 143,000 residents, the district is located in
fast-growing Hidalgo County, adjacent to the U.S.-Mexico border and near
the southern tip of Texas. The district's service area includes
primarily the City of Edinburg (LT bonds rated 'AA-' by Fitch), a small
portion of the City of McAllen (LT bonds rated 'AA+') and unincorporated
areas of Hidalgo County (LT bonds rated 'AA-').

The district's average daily attendance (ADA) is at about 31,700
currently. Although annual ADA growth since 2012 has been modest (less
than 1% in 2012, 2013 and 1.3% estimated for 2014), annual ADA gains
averaged 3.7% over the previous five years. The district projects flat
to modest growth in the near term, and has historically underestimated
growth to provide a budgetary cushion.

SOLID FINANCIAL PERFORMANCE

The district's financial position remains solid. Conservative fiscal
practices have yielded operating surpluses and healthy and increasing
reserves. This even as the district addressed recent year enrollment
growth related needs and state funding uncertainties. In response to the
state aid reductions included in the state's fiscal 2012-2013 biennial
budget, the district implemented budget reductions, cutting 136
positions even as it opened two new schools.

The district's unreserved/ unrestricted general fund balances have been
above 17% of spending for the last three fiscal years. The FY 2013
unrestricted general fund balance was $61.5 million or 19.6% of
expenditures and transfers out. This represented a slight increase from
$59.1 million or 19.4% in FY 2012. Current budgetary basis estimates for
FY 2014 indicate another small operating surplus of about $1.8 million
for the district's primary operating fund. This represents the bulk of
the consolidated general fund presented in the district's audits. The
consolidated general fund includes additional smaller funds, which in
aggregate are expected to be balanced for 2014.

SWITCH OF OPERATING AND DEBT SERVICE TAX RATES

The district's total tax rate (1.2398 per $100 TAV) has remained
unchanged since FY 2011. As part of the district's post Hurricane Dolly
recovery, per state law, the district was allowed to raise its O&M tax
rate in FY 2012 to the state cap of $1.17 per $100 TAV from 1.04 without
voter approval for one year. To maintain a flat total rate, the district
lowered its interest & sinking (I&S) tax rate by an equal amount.

The O&M tax rate was increased permanently to the maximum rate of $1.17
per $100 of TAV for FY 2014 following voter-approval. The I&S fund rate
was correspondingly decreased in September 2013. The swap is estimated
to provide the district with approximately $8 to $12 million in
additional annual net revenue derived from increased state aid for
operations. Fitch views the use of this tax rate swap cautiously.
However, Fitch notes that the I&S rate could be raised without voter
authorization to repay the bonds and the swap could be reversed if
needed.

BELOW AVERAGE ECONOMIC INDICATORS

The district economy is anchored by the distribution of agricultural
products and goods shipped from Mexico, as well as oil and gas
exploration. Currently at about $5 billion, the district's TAV saw
strong annual growth from FYs 2006 to 2010, but experienced volatility
in recent years due to reductions in mineral values. TAV declined in FY
2013 by about 12.3% but remained essentially flat (0.3% growth) in FY
2014. Four of the top 10 taxpayers are in the mineral/ oil and gas
sector. The single largest taxpayer, Oxy USA Inc. (a subsidiary of
Occidental Petroleum Corporation), represents 4.2% of TAV. The district
expects modest TAV growth in the near term as volatility in the oil and
gas sector is moderated by growth in other sectors.

Local unemployment rates have seen improvement in recent years, though
remain above average. The Hidalgo County unemployment rate of 9.4% as of
March 2014 is well above state (5.3%) and national (6.8%) rates. The
comparable city rate is lower, at 6%, which still exceeds the state
rate, but is below the national average. County per capita personal
income and median household income lag far behind those of the state and
nation, though both have seen good growth in recent years. As a result,
from 2007 through 2011, the city's poverty rate declined from 34.3% to
27.8% and the county rate declined from 37.5% to 35.3%. Poverty rates
are still considerably higher than state (17.0%) and national figures
(14.3%).

MODERATE DEBT PROFILE

The district's FY 2013 debt ratios are midrange at $2,141 per capita and
4.5% of market value. These do not reflect state support of about 48% of
annual debt service. Including this support, debt service as a
percentage of governmental spending is low at about 3.7% in fiscal year
2013. Amortization is average, with about 51.5% of principal maturing in
ten years.

Voters approved bond propositions in May 2008, with proceeds funding the
construction of seven new schools. The district has no remaining
authorization to issue additional bonds, and there are no near-term
plans to return to voters to approve additional issuance.

The district contributes to the Teacher Retirement System of Texas
(TRS), a cost-sharing, multiple-employer defined benefit pension plan.
The district's statutory pension contribution was modest at about 1.5%
of governmental spending in FY 2013 and the district has made 100% of
its required contribution in the last three years. Other post-employment
benefits (OPEB) are also provided through TRS, with the district's OPEB
contribution at less than 1% of spending.

TRS is adequately funded at 80.8% as of Aug. 31, 2013, though Fitch
estimates the funded position to be lower at 72.8% when a more
conservative 7% return assumption is used. Carrying costs for the
district (debt service, pension, and OPEB costs, net of state pension
and debt service support) totaled a relatively low 5.5% of governmental
fund spending in FY 2013. Starting in FY 2015, pension contributions for
all districts in the state will rise to 1.5% on the statutory minimum
portion of payroll, from zero, increasing carrying costs modestly.

TEXAS SCHOOL DISTRICT LITIGATION

In February 2013 a district judge ruled that the state's school finance
system is unconstitutional. The ruling, which was in response to a
consolidation of six lawsuits representing 75% of Texas school children,
found the system to be 'inefficient, inequitable, and unsuitable and
arbitrarily funds districts at different levels.' The judge also cited
inadequate funding and districts' inability to exercise "meaningful
discretion" in setting tax rates as constitutional flaws in the current
system.

The judge re-opened the lawsuit in June 2013 after state legislative
action that partially restored state funding levels and made other
program changes. The trial began in January 2014. If the state school
finance system is ultimately found unconstitutional, the legislature
will be directed to make changes to the system to restore its
constitutionality. Fitch would consider any changes that include
additional funding for schools a positive credit consideration.

In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS Global Insight, National
Association of Realtors.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.